These go to eleven: Pandora’s plans for growth

CEOs of companies whose stocks are down typically say that they aren’t worried about the drop. Brian McAndrews of Pandora makes a more persuasive case than most, if only because he’s seen this picture before.

Shares of the music-streaming company P have been halved this year to about $18 on weak user growth. For perspective, McAndrews calls on his experience a decade ago as CEO of the ad-technology firm aQuantive. “Our shares hit $20 in 2000, and in less than two years they were at 65 cents,” he says. “They were worth less than the value of the cash on our balance sheet.” By 2007 aQuantive had sufficiently rebuilt itself to be bought by Microsoft MSFT for $6 billion or $66.50 a share. “A lot of companies back then didn’t survive,” McAndrews reflects during a recent interview in San Francisco. “They were run by very smart 26-year-olds who didn’t know how to manage through a downturn.”

Today, 55-year-old McAndrews is managing through a boom—but in the face of intense competition. Pandora was an early leader in Internet music streaming and deployed unique technology that guessed a listener’s musical tastes. Its revenue this year will top $900 million. But music streaming has become a crowded market: iHeartRadio (which shares a parent company with iHeartCommunications, the former Clear Channel) and Apple’s iTunes Radio AAPL compete on ad-supported music. A number of services including Spotify, Apple’s Beats Music, and Amazon AMZN offer on-demand subscriptions. Services like Rdio offer both.

McAndrews joined the company just over a year ago, following the departure of longtime CEO Joe Kennedy. Tim Westergren, the genial face of and brains behind Pandora, remains with the company in the amorphous role of “founder.” McAndrews has installed a team of seasoned businesspeople, several of whom are in newly created roles. These include Sara Clemens, a former Microsoft and LinkedIn executive, as head of strategy; David Gerbitz, formerly of Yahoo, in charge of revenue operations (as opposed to selling); and Chris Phillips, who worked at Amazon and Intuit, to be Pandora’s chief product officer.

At 14 years old, Pandora is hitting the critical stage of middle age. For instance, its management team recently completed a five-month strategic-planning process, its first. “The company didn’t have one before,” McAndrews says. “It was too small.”

Wall Street has soured on the Pandora party because its user growth has slowed to the low single digits. It has more than 76 million users, and McAndrews expects that number to hit 100 million “in three to five years.” He plans to get there by spending on marketing, a first for the company. The company hired an ad agency to create a campaign, “Thumb Moments,” that celebrates how users express support for favorite artists. He says Pandora’s marketing budget next year will be “significantly higher” than this year, no doubt a weight on the company’s stock price.

Pandora is on stable financial footing. It has $400 million in the bank compared to iHeartMedia’s IHRT $19 billion in debt, a gap McAndrews seems to delight in pointing out. Pandora pays out a little over half its revenues in royalties to artists and music publishers, compared with 70% for Spotify. Yet future royalty payments loom large. Pandora has paid about $1 billion in royalties during its history; the recording industry unsurprisingly wants more. A congressionally mandated industry board sets streaming-music royalty rates, and it expects to rule on new rates a full year from now, creating uncertainty for Pandora. McAndrews’s company gets about 80% of its revenue from advertising and has built a sales team in 36 local markets.

During the period between selling aQuantive (he stayed on for a time at Microsoft) and joining Pandora, McAndrews worked at Madrona Venture Group in Seattle. He learned, he says, of the importance of the “pivot,” watching startups transition to different business models. Pandora isn’t abandoning its original model, which includes an ad-free subscription offering. But it is trying to make money new ways, including by using its reams of data on listener habits. It has established a “music industry group” that markets consumer insights to music companies.

“We believe there is more we can do to work with the industry and the artist to enhance the experience,” McAndrews says. With hope, these efforts will enhance Pandora’s bottom line—and its stock price, too.